Is Gold Going to Crash?

The most impressive run up in the price of gold was after the USA went off the gold standard. Gold rose from $20 an ounce in 1973 to $677 an ounce in 1980. Then a twenty year stock rally ensued and gold fell to the $400 range and down to the $260 range by 2000. Then lower interest rates helped drive gold up to $1,900 by 2011 only to fall back as the economy started to recover from the Great Recession and stocks rose. Both times higher interest rates and a strong stock market caused the gold boom to collapse. Today the stock market is surging and interest rates are headed up. Is gold going to crash again? Bloomberg reports that gold suffers worst run since last fall as bullion threatens to fall below $1,200 an ounce.

Gold is sliding toward $1,200 an ounce in its longest losing run since October as positive U.S. economic figures reinforce expectations that yields on other investments will rise this year.

The precious metal has been hit by Federal Reserve officials including Chair Janet Yellen talking up the prospect of higher rates this month. Better-than-expected U.S. private jobs data this week also boosted the dollar before official payrolls figures on Friday. A stronger dollar makes gold costlier for those with other currencies.

“If the data continues to be as good as it was, or improves, we could see the Fed move toward further hawkishness,” said Brad Yates, head of trading for Elemetal, one of the biggest U.S. gold refiners. “That could hurt gold.”

Gold bugs believe that eventually all paper currencies will be worthless and that the only folks with any wealth will be those with real estate, gold or precious gems. However, when the stock market generates great returns and bonds have a higher yield with higher interest rates gold tends to suffer. How long will a gold crash last?

How Far and for How Long Will Gold Fall?

Seeking Alpha discusses how far will gold fall?

What the markets seems to be overlooking is that as rates rise there will be a drag on sectors of the economy that have recently performed well. For example, the housing market and the market for auto loans are likely to take a meaningful hit as rates begin to creep higher. Perhaps more subtly, if the economic expansion that the market seems to be predicting comes to pass, coupled with the inflationary pressures expected, the real value of equity investments will necessarily decrease. This could finally be the catalyst needed for a meaningful correction in the stock market. A meaningful equity correction and rising inflation should be bullish for gold.

These folks are looking a step ahead. Trump’s wishes to bring back offshore cash, spend on infrastructure and cut taxes have gotten investors thinking of a booming economy and they are driving the stock market higher. Meanwhile the Fed is looking to keep raising interest rates as Trump’s policies, if enacted, will breed inflation. And inflation is a friend of gold. Likewise tax cuts without a lot of economic growth were part of the recipe for the Great Recession and a greatly devalued dollar. Is gold going to crash? Maybe it will. Will the crash last for very long? It probably will not.